Sector financial performance:

This company, who primarily designs, manufactures, markets, and distributes lifestyle-active&casual footwear for men, women, and children mainly through wholesale and as well through retail/ecommerce sites, has been grouped into lifestyle footwear (wholesale/retail) sector in footwear industry.

There is an apparent downward pressure on US market sales of companies in this sector as indicated by their domestic wholesales. As we see from our data, the average growth in sales (US market mainly) has been weak (growth rate at 0% and -5% in 2017 and 2016) compared with 6% growth in 2015, which is consistent with situation in the whole retail industry of US market. The decrease has been reflected in decrease in sales volumes while reduced largely selling price (in most of cases) from both companies’ wholesales, as a result of decrease in demand from their retail customer such as department stores, and companies’ own retail. The decrease in domestic market seems to have been offset partially by strong growth in the international market as indicated by an average 20% annual growth in wholesale of international market during the same period.

Sales seem to be rebounding since the second half of 2017 and continued into 2018 as indicated by an average 3% growth in 2018 for those companies’ wholesale in US market. Data indicates that sales volume seems to be sensitive to reduction in price, which may mean that demand is getting stronger, especially from online purchasers.

Before 2017, when companies generally used method of lowering price to boost decreasing sales, it seems demand for footwear was weak but did not go away as indicated by the relatively strong economy elastic of price. Therefore, due to sales’ rebound quickly after promotion and markdowns the average selling price did not go too deep. Plus, strong performance of some companies in international market, which have higher gross margin, helped these companies to keep gross margins uncontaminated. However, the SG&A as percentage of sales increased for most of companies as a result of currency and store closure’ impacts and thus companies’ operating margins decreased slightly. However, after entering 2017 due to strong demand online and stronger economy elastic of price, sales (volume) rebounded quickly and improved largely margin of companies in this sector.

The current average gross margin is 47% in this sector (depreciation and store costs excluded) with an average SG&A as percentage of sale of 38%. And this makes an average operating margin of about 9%.

According our analysis, companies’ enterprise price/EBI ratios are average 23with interest/EBI ratios of 4%. 

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Company performance:

The demand for this company’s footwear seems to have been weak between 2015 and 2017 as indicated by decrease in net revenue while sales volume has continued to increase driven by reduced price. However, since the second half of 2017 the demand seemed to have been stronger driven by online sales as indicated by a positive increase in net revenue ( less reduction in price but higher volume sold).

The first six months of fiscal 2018 compared with 2017

Organic sales (excluding currency) increased 1.5% primarily attributable to increase of 3.1% in sales volumes (driven by increase of 24% in e-commerce) offset by decrease of about 1.6% in lower average selling prices.

The fiscal 2017 compared with 2016

Net sales decreased 1.2% primarily attributable to decrease of about 5.5% in lower average selling prices offset increase of 3.8% in sales volumes.

The first six months of fiscal 2017 compared with the same period of 2016

Net sales decreased 2.9% primarily attributable to decrease of about 4.5% in lower average selling prices offset increase of 1.6% in sales volumes.

Fiscal 2016compared with 2015

Net sales decreased 5% primarily attributable to decrease of about 4.2% in sales volumes and decrease of 0.5% in lower average selling prices. Sales from wholesale decreased 7.6% and sales from retail decreased 5%.

Fiscal 2015 compared with 2014

Organic sales decreased about 2% primarily attributable to decrease of about 3% in store closures and decrease of 2% in selling price offset by increase of 3% in sales volumes. Organic sales from wholesale decreased 3.6% and organic sales from retail decreased more than 6%.

This company’ gross margin was about 50% in 2016 presenting no changes compared with that in 2014 as a result of lower selling price and reduction in product costs. While this company has managed to lower its SG&A expenses, due to deleveraging of decreasing sales its SG&A as percentage of sales increased and lower down its operating margin about 1%. As sales continued shifting to higher margin products and production costs decreased, its gross margin was improved to about 51% in 2018. With improved SG&A% due to continuous closure of stores, it operating margin went up to about 4% in 2018.

Stock price

This stock currently has an enterprise price/sales ratio of about 1.4. We think that its stock is being relatively slightly overvalued considering that it is difficult to explain for its price/sales ratio of as high as 1.4 based on its performance in sales and the whole industry climate in the past several years.

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